Using the 2:3 Rule with a Position Calculator for Forex Trading

Jul 12 • Forex Calculator • 2238 Views • 1 Comment on Using the 2:3 Rule with a Position Calculator for Forex Trading

If you are a dyed in the blood forex trader, you must have heard of the 2:3 Rule in forex trading. The 2:3 Rule is a conservative risk management strategy used by many cautious foreign currency traders. Forex traders have every reason to be cautious most of the time since the forex market is a highly volatile market peppered daily by wide and wild price swings. You will commonly see an individual trader devise a position calculator of his own based on this rule and using only MS Excel. They are fully aware that a prudent money management strategy such as the 2:3 Rule is the best way to mitigate the risks of a highly volatile market such as forex.

The 2:3 Rule simply states that you should never commit more than 2% of your trading capital for each trade and that you should not have more than 3 open positions at a single time. In effect the maximum amount you should risk in any single time should be no more than 6% of your available trading capital. For example, if you have a $10,000 trading account you should not risk more than $200 per open position or a maximum of $600 for the 3 open position limit in a single trading instance. While traders with a bigger appetite for risks may smirk at such a conservative and minute capital exposure, the more seasoned ones find the rule much to their liking.

Unfortunately, using the rule with an Excel based position calculator is still a tedious process that won’t be able to keep up with the fast paced movement of forex prices in real time. The advent of an online position calculator that can be installed on a Metatrader trading platform as an indicator made the task of position sizing easy and on real time feeds at that. The 2:3 Rule can be incorporated into the trading platform to enable traders to make quick and easy trading decisions.

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Using the position calculator with Meta trader is easy. You simply set the currency pair you intend to trade and the percentage of your account you wish to risk (based on the 2:3 Rule) and the calculator will automatically determine and suggest the ideal maximum position size you can take based on your account balance. If you are trading a currency paired against the US Dollar, the position calculator you can set your own custom pip stop level and it will calculate your position size as well as help you determine the cut loss points and profit taking target levels for each trade.

Being able to calculate position size on the same software you use for trading allows the trader to be on top of the very volatile foreign exchange market. With an online position calculator, a trader will be able to take advantage of price movements without worrying about over leveraging.  He will be able to make position adjustments fast without over trading. The best part is, he will be able to avoid losing money he really doesn’t want to lose.

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